Kevin A. Kordana

Tax Increases in Municipal Bankruptcies

Chapter 9 of the Bankruptcy Code does not address the issue of whether a bankrupt municipality must increase taxes as a condition for confirming a reorganization plan that places losses on bondholders. The standard analysis of the issue has emphasized the moral hazard that would arise if such increases were not compulsory. This Article argues that the moral hazard-based argument for tax increases is misplaced because the legal and economic structure of municipal finance work to constrain municipal opportunism. Drawing from the literature on sovereign borrowing, it suggests that moral hazard in borrowing is limited by the potential for deterred investment and high-cost borrowing in the future. This result holds when we consider the incentives of municipal officials and the likely monitoring strategies of residents and investors. Moreover, some loss-shifting from residents to investors is sensible, because investors are better risk- bearers than residents. Due to the structure of Chapter 9, a presumption of regularity with respect to municipal reorganization proposals will act as a default rule, because states can condition the ability of their municipalities to seek Chapter 9 protection.

Taxation, the Private Law, and Distributive Justice

We argue that for theorists with a post-institutional conception of property, e.g., Rawlsians, there is no principled reason to limit the domain of distributive justice to tax and transfer-both tax policy and the rules of the private law are constructed in service to distributive aims. Such theorists cannot maintain a commitment to a normative conception of private law independent of their overarching distributive principles. In contrast, theorists with a pre-institutional conception of property can derive the private law from sectors of morality independent of distributive justice. Nevertheless, we argue, this does not entail that the private law, for pre-institutional theorists, must be sanitized of equity-oriented values. Non-libertarian pre-institutional theorists holding principled commitments to equity-oriented values are free to invoke either tax and transfer or the rules of the private law to attain them.